TEXT-Fitch cuts San Benito CISD, Texas ULTs to 'A'

Thu Sep 6, 2012 4:21pm EDT

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Sept 6 - Fitch Ratings has downgraded the following San Benito Consolidated
Independent School District, TX's (San Benito CISD) bonds to 'A' from 'A+':

--$62.7 million of unlimited tax (ULT) bonds, series 2004, 2005, 2005 refunding,
and 2008.

The Rating Outlook is revised to Negative from Stable.

SECURITY
The bonds are secured by an unlimited ad valorem tax pledge levied against all
taxable property within San Benito CISD. The bonds are additionally secured by
the Texas Permanent School Fund, whose bond guarantee program is rated 'AAA' by
Fitch.

KEY RATING DRIVERS

BUDGET IMBALANCE EVIDENT: Continuing use of operating reserves to support
recurring expenditures is the key rating driver supporting the downgrade and the
Negative Outlook. State budget cuts, together with spending pressures and lack
of meaningful budget adjustments, triggered over a 30% decline in fiscal 2012
reserves and an additional draw-down is budgeted in 2013.

UNCONVENTIONAL TAX RATE STRUCTURE: The transfer of a portion of the tax rate
from debt service to operations, while designed to yield maximum overall state
funding, requires annual general fund subsidization of debt service and remains
of concern to Fitch. The board retains the ability to raise the debt service tax
rate as needed but this unconventional tax rate structure has remained unchanged
since fiscal 2010.

RELIANT ON STATE AID: The district is highly reliant upon state revenues to fund
operations as a result of its low wealth per student and remains subject to an
uncertain state funding environment.

MIXED DEBT PROFILE: Debt ratios are above average as a percentage of the
district's full market value (MV) and the pace of debt retirement is average.
However, the aggregate fixed cost for debt, pensions, and other post-employment
benefits (OPEB) is affordable.

SUBPAR SOCIECONOMIC INDICES: The area economy is fairly diverse but, typical of
many Texas border communities, suffers from chronically high unemployment, high
poverty, and low wealth metrics.

STABLE TAXPAYER BASE: Growth in taxable assessed value (TAV) has moderated in
recent years after nearly doubling from 2001 to 2011. Fiscal 2013 TAV is
essentially unchanged from the prior year.

WHAT COULD TRIGGER A RATING ACTION

DECLINE IN RESERVES: Inability to return to structural budget balance would
apply downward pressure on the rating.

CREDIT PROFILE

STATE BUDGET CUTS HAVE TRIGGERED USE OF RESERVES FOR OPERATIONS
The downgrade to 'A' primarily reflects the significant depletion of reserves in
fiscal 2012 resulting from state budget cuts and lack of corresponding budget
action by the district. The district used over one-third of its reserves ($5
million) to support operations in 2012, an amount roughly equal to the budgeted
deficit.

While the 2012 audit is not yet available, the draw-down would drop total
general fund balance to about $9.5 million or 10% of spending compared to 18% of
spending in fiscal 2010. The district achieved only marginal cost savings from
an early resignation incentive program that was initiated to offset an estimated
$5 million loss of state formula-funding, and also absorbed increased operating
costs with the opening of a new elementary campus.

The recently adopted fiscal 2013 $96.8 million operating budget again
appropriates $1.9 million of reserves (20% of remaining reserves) to fund
operating expenditures while leaving the tax rate unchanged. Flat state revenues
and the loss of one-time federal funds prompted management to cut about $1
million from the budget by reducing campus police hours, shuttering a day-care
center and laying off its five employees, holding 14 budget positions vacant,
and limiting eligibility for the district's pre-kindergarten program.
Nevertheless, the cuts were insufficient to bring the budget to balance and if
budget projections materialize at year-end, fiscal 2013 operating reserves would
drop to 8% of spending.

Fitch notes the district's decision to draw on reserves to subsidize operations
and lack of willingness to raise revenues as a credit concern. Fitch cautions
that continuing use of reserves would be unsustainable, particularly given the
uncertain state funding environment and limited resource base of the district,
and would likely trigger further negative rating action.

SWITCH OF OPERATING AND DEBT SERVICE TAX RATES REMAINS IN EFFECT
The district does retain a degree of financial flexibility with a relatively low
tax rate that could be raised with board approval. The total tax rate has remain
unchanged since fiscal 2010 when the district executed a tax-rate swap, whereby
voters approved a $0.13 increase to the operating tax rate, yielding maximum
state aid for operations, while reducing the debt service tax rate by the same
amount.
The net effect of the swap was a level total tax rate and enhanced operating
revenue, but an annual debt service fund shortfall of about $3.5 million that is
subsidized by general fund resources. Fitch views the use of this tax rate
structure with concern but notes the debt service tax rate can be raised as
needed (without voter approval) - thereby easing pressure on the general fund -
and the tax rate swap could be reversed, if necessary.

MANAGEABLE LONG-TERM LIABILITIES
Because state debt service aid is a function of wealth and local taxing effort,
the reduction to the debt service tax rate also triggered a drop in direct state
debt service aid - from 80% in fiscal 2010 to 45% in fiscal 2011. The gap is now
being funded from a mix of the enhanced state and local operating revenues
mentioned above.

Overall debt is modest on a per capita basis at $1,599 but above average as a
percentage of market value at 6.8%. The pace of amortization is average at 45%
retired within 10 years and the annual carrying cost is affordable at 6.4% of
general fund and debt expenditures. Officials have no plans to issue additional
bonds in the near term.
The district provides its employees with pension benefits through its
participation in the Texas Retirement System of Texas (TRS), a cost sharing
multiple-employer plan. The district's fiscal 2011 required contribution to TRS
was $420,000, which represented a low 0.5% of fiscal 2011 general fund spending.
The aggregate fixed-cost burden for debt, pension and OPEB was an affordable
7.2% of 2011 general fund and debt service expenditures.

LIMITED BUT STABLE RESOURCE BASE
This Rio Grande Valley district covers a 100 square mile area in Cameron County
and serves the city of San Benito and certain unincorporated areas of the
county. Estimated enrollment is just over 11,000 and enrollment growth has
moderated from the 2% average annual gains seen from 2000-2010, in part due to
competition from nearby charter schools.

The area economy is based on agriculture, fishing, manufacturing, trade and
tourism and also benefits from its trade links with Mexico; the City of San
Benito (rated 'A+' by Fitch) is a commercial and tourist center for the
surrounding region. Employment totals in Cameron County increased 7% from 2007
to 2011 and grew another 1.3% for the 12-month period ending June 2012, dropping
the county's unemployment rate to a still high 11.4% from 12.5%. The area's high
unemployment rate and low wealth indices are typical of most Texas border
communities.

The district's taxable base registered consistent growth in the past five years,
and, while slowing during the economic downturn, averaged 3% annual gains from
2007-2012. Certified fiscal 2013 assessed values are essentially flat from 2012
at $838 million. Approximately half of the taxpayer base is residential
properties and no single taxpayer accounts for more than 2.5% of total
valuations.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index,
IHS Global Insight, Zillow.com, National Association of Realtors, and Texas
Municipal Advisory Council.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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